Leasing tends to suit equipment a Searcy, AR business expects to replace within a few years, and financing tends to suit equipment it plans to keep and that holds its value. The deciding numbers are the end-of-term terms and the total cost, not the monthly payment. The invented comparison below shows the answer flipping with resale value.
End-of-term options first, then an invented lease-or-loan comparison, then which equipment suits which, then taxes.
Ownership, buyouts and end-of-term options
Equipment financing makes the business the owner from day one, with the lender holding a lien until the last payment. Under a lease the leasing company keeps title, and the options when the term runs out vary with the kind of lease signed:
- Fair market value lease: when the term is up, the business can hand the equipment back, extend, or pay what it is then worth
- $1 buyout lease: the business buys the equipment for $1 after the last payment, which works much like a purchase
- Fixed purchase option: the price to buy at the end is set in the contract, for example 10% of the original cost
Read the end-of-term clause before the payment. A lease that renews month to month unless the business gives written notice can keep charging after the equipment has been paid for many times over.
Monthly cost compared with total cost
Illustration only, invented figures: an $18,000 computer and imaging setup can be leased for $520.00 a month over 36 months on a fair market value lease, or financed at an annual rate of 10% over the same 36 months for $580.81 a month.
| Option | Monthly payment | Total paid | Worth at the end | Net cost |
|---|---|---|---|---|
| Lease, returned at the end | $520.00 | $18,720.00 | Returned | $18,720.00 |
| Loan, setup resold for $4,000 | $580.81 | $20,909.16 | $4,000 | $16,909.16 |
| Loan, setup resold for $1,000 | $580.81 | $20,909.16 | $1,000 | $19,909.16 |
The lease is $60.81 a month lighter. If the setup still sells for $4,000 after three years, owning it costs $1,810.84 less than leasing; if it is worth only $1,000, owning costs $1,189.16 more. The monthly payment does not show which case applies; the resale value does.
The table also leaves out what each option asks for at signing and at the end. A lease can add reconditioning or return-freight charges under its return conditions, and a loan can ask for a down payment. Add those to each total before choosing.
Technology that ages in a few years versus heavy equipment
Computers, diagnostic systems, point-of-sale terminals and imaging gear lose value within a few years as newer models arrive. A lease shifts that loss to the leasing company and lines up a replacement at the end of the term. A dental office replacing digital imaging is one of 21 offices of dentists (NAICS 621210) in the 2023 County Business Patterns for White County, AR, a trade where equipment can be outdated well before it wears out.
Heavy equipment runs the other way. A dozer or a track loader can work for many years and still sell used, which is the argument for financing and keeping it. The 16 site preparation contractors (NAICS 238910) the same 2023 count found in White County, AR work in the trade built around that kind of machine. A long-lived purchase with installation can also fit a term loan, and smaller tools replaced often can go on a line of credit.
Tax treatment: a question for the shop's accountant
A lease and a loan are treated differently on a business tax return, and a $1 buyout lease can be treated like a purchase rather than a rental. Which treatment applies, and in which year, depends on the contract and the business's own return.
That makes the accountant the right person to ask before signing, with both quotes in hand. Greenford and its funding partners do not give tax advice. When the choice is made, the online request starts a partner review, and more posts are on the blog.
By Greenford Advances · Updated
